Thursday, October 2, 2008

"Beware of Geeks bearing formula's...."

Warren Buffet was on Charlie Rose last night. He uttered the above phrase, which really struck me because I was intending to talk about my 'new books formula' today. I still will, (tomorrow), but....well, remember the above warning.

He called this an economic "Pearl Harbor" and used the word Depression. (An increase to 9% unemployment would mean a loss of 3 million jobs.) He's an Obama supporter, thinks it's disgraceful that his secretary pays more taxes than he does, equates capital gains with payroll taxes, and is quite the liberal.

Mostly he spouted common sense, but not anything I haven't heard from someone else.

He has a great deal more confidence in the economic types like Paulson and said, if anything, Congress should be forthcoming with even more money and less meddling.

He has also, I believe, invested something like 8 billion dollars of his own money into G.E. and Goldman Sachs, so he's definitely betting Congress comes through.

What I really noticed was that he had tons of cash laying around for "2 years" and was just looking for the right moment to reinvest. In essence, he's buying into blue chip companies at distressed prices.

The Sage of Omaha -- the richest man in the world -- has probably just increased his wealthy by a hefty chunk, because he was holding cash when the big guys needed it.

I've been kicking myself for not following my original instincts and trying to extract cash out of my business back in August 2006, instead waiting another 8 months, by which time it was really too late.

On the other hand, I added new books and boardgames instead, and that's proving to be the one bright spot in my store.

Still, cash is King. As Buffet just proved again.

10 comments:

RDC said...

One thing to note about his purchases. They are not normal stock buys. Basically he is using the opportunity to get a steady 10% return on the cash invested with both downside capital protection and upside capital potential. discount to current stock price, 10% interest, additional options to buy at set price, etc.

RDC said...

Of course being a shareholder in Berkshire Hathaway I am very happy about all such deals he can put together.

Duncan McGeary said...

Also unlike Buffett, I would have no ready use for my cash except as emergency funds. Nothing that I could use to leverage my inventory, or my bills, whatever.

So...I think I was probably better off investing it in my own store and trying to make my store work better.

You simply can't run a store on a risk free basis.

I tried to really hold back for about 3 months there, and....it completely demotivated me. I almost lost interest. I was just coasting.

But investing in new books and games -- within reason -- has got me engaged again.

RDC said...

Duncan,

I would not be surprised if we were to enter a period of deflation in the near future. It is a very good time to have a cash cushion.

Duncan McGeary said...

"I would not be surprised if we were to enter a period of deflation in the near future. It is a very good time to have a cash cushion."

How so? Because I can get more bang for the buck?

I'm already buying a heft percentage of 'distressed' product, which I doubt will increase in quality, though maybe in quantity.

I've always felt --rightly or wrongly -- the best bang for my buck was in my own business. Investing in my own skills and ideas.

Problem is, how do I get it back out again?

Buffett was talking about inflation being inevitable. Are you thinking a deflationary period followed by a n inflationary period?

He also called this a 'recession' in any common sense use of the word. And felt it would last anywhere from 6 months to 2 years, leaving the impression he believed more in the latter.

He said the 'bail-out' would only keep it from being worse, and that most of us wouldn't even notice it.

RDC said...

The closest model we have to what is now happening in Japan of the 80's, which experienced considerable deflation. We are already seeing it in real estate and it is creeping into other areas.

There is the inflation aspect related to the value of the dollar vs other curencies. However, many of them are also experiencing severe problems, the dollar is actually gaining at this time.

We are actually at an interesting pivot point. Too little intervention or wrongly applied and we can easily go to Japan style deflation and major depression, too much intervention and it will drive inflation or more a 70's style stagflation. In the short term I am currently leaning towards deflation, atleast through 2009 and into 2010. The challenge is to avoid going to deep in that direction.

RDC said...

Duncan,

Question - Did he say that most people would not notice the impact of the bailout being passed? As in we are already in a recession and the Bailout is not a silver bullet to solve the crisis immediately.

Or was it that most people would not see any difference if the bailout were passed or not? The later would imply that to most people the depth of the crisis is going to be the same.


My understanding of Buffett position is the former rather than the later. That is to say that since conditions are already bad most people won't notice because it will not immediately improve conditions. He is on record saying that if it does not pass it will be a disaster and that the impact on the economy will be severe, with a very deep and long recession. Which people would certainly notice.

blackdog said...

"Because I can get more bang for the buck?"

Because in a deflationary period your cash actually gains value, as opposed to losing it in normal (inflationary) times.

But have we ever seen actual deflation in this country since the 1930s? I don't think so.

Duncan McGeary said...

The former, for sure.

RDC said...

The other thing that makes me think deflation, atleast it the short term is the behavior of commodities. Gold, in particular, is not acting as one might expect in these times, instead of charging ahead it is acting pretty soft. The other commodities are going well beyond soft in the price moves down.

So if you look at major categories and pricing:

Commodity prices dropping
Stock prices Dropping
Housing prices Dropping

coupled with retail sales on major items such as autos dropping, employment dropping.

That emplies to me that companies are losing pricing power, at the same time that their commodity prices are softening.